Reinvestment Rate

AAA

DEFINITION of 'Reinvestment Rate'

The amount of interest that can be earned when money is taken out of one fixed-income investment and put into another. The reinvestment rate is the amount of interest the investor could earn if s/he purchased a new bond, if the same investor is holding a callable bond that is called due because interest rates have declined. If the original bond paid 5% and the new bond pays 3%, the reinvestment rate is 3%.


The possibility of such an interest-rate drop is called "reinvestment rate risk".

INVESTOPEDIA EXPLAINS 'Reinvestment Rate'

Anticipated reinvestment rates play a role in investors' decisions about what term to select when purchasing a bond or CD. An investor who expects interest rates to rise might select a shorter-term investment, under the assumption that the reinvestment rate when the bond or CD matures will be higher than the interest rates that can be locked into on longer-maturity investments today.

RELATED TERMS
  1. Reinvestment Risk

    The risk that future coupons from a bond will not be reinvested ...
  2. Prime Rate

    The interest rate that commercial banks charge their most credit-worthy ...
  3. Effective Yield

    The yield of a bond, assuming that you reinvest the coupon (interest ...
  4. Annual Percentage Yield - APY

    The effective annual rate of return taking into account the effect ...
  5. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic ...
  6. Personal Finance

    All financial decisions and activities of an individual, this ...
Related Articles
  1. Six Biggest Bond Risks
    Bonds & Fixed Income

    Six Biggest Bond Risks

  2. Callable CDs: Check The Fine Print
    Investing Basics

    Callable CDs: Check The Fine Print

  3. Callable Bonds: Leading A Double Life
    Options & Futures

    Callable Bonds: Leading A Double Life

  4. What are the risks of investing in a ...
    Investing

    What are the risks of investing in a ...

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center